Foote, Gerardi and Willen admit that economists are no closer to explaining the U.S. house mania than they are to understanding the tulip mania in Holland almost four centuries ago.
Foote, Gerardi, Willen, and Lane have some homework to do (start with this and this). Bill Black explains the "housing mania" over and over again. First of all, it was a credit bubble. The "housing mania" was a product of that credit bubble. The credit bubble was the product of fraud. The fraud was the product of perverse incentives:
Bill Black's Recipe for Bankers to become Billionaires: 1. Grow massively, 2. By making very poor quality loans at high rates of interest, 3. Use extreme leverage (high corporate debt), and 4. Set aside virtually no loss reserves for the massive losses that will be coming. If you do these four things, you are mathematically guaranteed to report record short-term income. Akerlof and Romer referred to it as a sure thing - it is guaranteed.